If you’re planning on buying a home with a partner or friends there can be serious financial risks involved if you don’t take the right precautions.
A break down in the relationship can see you leaving with less than you put in.
This is Money asked Ben Evans, senior associate at law firm Slater and Gordon, for his advice on how you can protect yourself.
Written agreements can cut out a lot of confusion if a relationship ends and the house is sold
Consider a cohabitation agreement
A cohabitation agreement is a written agreement between individuals who live together, or intend to live together.
The agreement can record who is bringing what assets into the relationship, how any property acquired during the relationship should be owned and who will be responsible for what during the relationship.
Ben Evans, senior associate at Slater and Gordon Lawyers
In addition it can provide a framework for what will happen in the event of a separation.
The simplest way to think of it is as an insurance policy – something you hope you never have to use, but is there for your own peace of mind.
There is a common misconception that a cohabitation agreement, much like a pre-nuptial agreement, is legally binding.
This is not the case, at least not in the jurisdiction of England and Wales.
Whilst they are lawful, they are governed by the ordinary rule of contract which means the individual terms or agreement can be challenged in court.
It is important that steps are taken to review cohabitation agreements periodically so they remain valid, particularly where there is a significant event such as the birth of a child.
People often think that couples who have been living together for a long period of time are ‘common law’ husbands and wives, but there is no such legal status in the UK and so they do not have the same rights and protections as those who are married.
When a couple have joint mortgage the lender can go after either one of them for repayment
Who has to pay off the mortgage if we break up?
Where a couple have joint liability for an outgoing, such as a joint mortgage, they are jointly liable, which means the mortgage company is entitled to go after either one of them for repayment.
If the mortgage is in the name of one person then that person will be solely liable for the mortgage payments, despite any contributions that may have been made by the other cohabitant.
If it is in joint names then it is up to them to resolve who owes what and how the contributions towards the mortgage should continue.
A cohabitation agreement can specify who should contribute what including what proportion should be paid towards the mortgage.
This can provide certainty to the individuals about where they stand in the event of a relationship breakdown.
How can I protect the money I put in?
If you own a property as tenants in common then you each own a defined share. If the property is held as ‘joint tenants’ consider severing the joint tenancy.
Tenants in common allows the parties to hold the property in unequal shares, which would suit the person who contributes the most towards the mortgage and running of the household.
A record of significant payments towards the acquisition, maintenance and improvement to any property could prove vital to establishing that one party has a greater interest in the property over the other.
Joint tenants vs tenants in common
If you are joint tenants you each have an equal ownership of the property. One of the key implications of being a joint tenant is the ‘right of survivorship’.
If one of the joint tenants were to die the remainder of the property transfers automatically to the other surviving joint tenant or tenants, irrespective of whether a will specified otherwise.
Tenants in common differ in two key respects – firstly they do not have to have equal ownership of a property.
In addition the rights of survivorship does not apply to tenants in common, meaning if one of the tenants were to pass away they can leave their share in a will to someone else, or the rule of intestacy can apply.
You can sever a joint tenancy by giving the appropriate notice to the other tenant, thereby resulting in you being tenants in common and allowing there to be an interpretation as to what proportion of the property each tenant owns.
Unmarried homeowners aren’t afforded the same legal protections in the event of a separation
What is a declaration of trust?
A declaration of trust is a formal legal document which sets out how an asset or property is owned.
You may wish to have one drawn up when purchasing a property to reflect that one of you holds a greater interest in the property over the other, such as where one party has put a greater deposit down or intends to contribute more towards the mortgage.
Where a declaration of trust exists, it will be easy to determine the beneficial interests in the property.
When purchasing a property the Land Registry also requires co-owners to specify how the beneficial interest in the property is held.
Where there is no declaration of trust the position can be very unclear and if those concerned are unable to reach an agreement then the matter can be determined by the court, which can be both costly and time-consuming.
What happens with divorce?
A divorce will impact upon any previous arrangements regarding finances, particularly if children are involved, so anyone going through a separation should review these arrangements, including their will.
Under the Matrimonial Causes Act 1973, an individual can make an application for financial support from their former spouse for maintenance or alternatively seek a share of their former spouse’s pension.
An application can also be made for a transfer of the property from one spouse to another, or even payment of a lump sum. Unless an agreement is reached these will be decided by the court.
Ultimately, individuals going through a divorce are provided with a greater range of applications to the court to help them protect their financial position. Cohabiting couples who separate, however, are not afforded the same rights.
Getting a divorce or separating does not change the status in which you hold the property. If you were joint tenants while you were married, you will continue to be joint tenants unless steps are taken to sever the joint tenancy.
Your ex could move out of the property leaving you there in occupation, move into their own property with a new partner, even get married again, but your ex would still be the joint tenant of the property you live in.
For this reason it is advisable for steps to be taken to sever the joint tenancy upon the breakdown of a relationship.